Federal Court Invalidates Crowd-Funding Patent

July 26, 2015 - 9 minute read

On June 29, 2015, the federal district court in New York City, Judge Katherine Polk Failla, further narrowed the patent protection for computerized business methods by invalidating a patent for computerized crowd-funding of artists. Kickstarter, Inc. v. Fan Funded, LLC, No. 11 CIV 6909 (S.D. N.Y. 6/29/15); 2015 U.S. Dist. Lexis 84015. The lesson of this case and recent federal court jurisprudence is that computerized business methods will only be patentable if the patent claims state that the invention requires specialized computer hardware or software to address a novel process or product, or transforms information or physical items in a unique way. Patent claims that describe generic computers, generally available software and the Internet to expedite an existing business process are unlikely to be approved by the U.S. Patent & Trademark Office and the federal courts.

Rodney & Etter is available to consult with inventors and businesses about cost-effective approaches to protect intellectual property with patents and other protections. Computerized business methods and software may also be protected using a combination of Copyright registration, Trademark registration, trade secrets and contracts, rather than patents.

The Kickstarter Case: In 2011, Artistshare, Inc., was granted Patent No. 7,885,887 for a “Method and Apparatuses for Financing and Marketing a Creative Work,” described in the patent abstract as,

The present invention is directed to a system and method for raising financing and/or revenue by artist for a project, where the project may be a creative work of the artist. The method including registering, by at least one artist, with a centralized database, at least one or more projects, offering, by the at least one artist, an entitlement related to the artist in exchange for capital for the project of the artist. The method and system may also include searching, by an interested party, the centralized database, for the least one artist, registering, by the interested party, with the centralized database and accepting the offer by the interested party for the entitlement related to the project. The capital may then be forwarded to the artist and the entitlement provided to the interested party.

After Artistshare asserted that Kickstarter’s crowd-funding approach infringed Artistshare’s patent, Kickstarter went into federal court and asked the court to declare that Artistshare’s patent was invalid on the grounds that the concepts and methods of funding artists were not new and that Artistshare’s use of computers and software to expedite funding of artists was not patentable.

After reviewing the patent claims and recent federal court decisions, Judge Failla concluded that Artistshare’s “patent’s claims are directed to the concept of crowd-funding or fan-funding, i.e., raising funds for a project from interested individuals in exchange for incentives. These claims are squarely about patronage — a concept that is “beyond question of ancient lineage.” 2015 U.S. Dist. Lexis 84015, *36. The Court held that Artistshare’s use of pre-existing common computers, software and the Internet to expedite the funding for artists was not sufficiently specific and inventive to overcome the prohibition on patenting mathematical formulas. 2015 U.S. Dist. Lexis 84015, *43.

The History of Patents for Computerized Business Methods:

Patents have a long history in the United States. The Patents and Copyrights Clause of the U.S. Constitution provides that Congress has the power “to promote the progress of science and the useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Constitution Article I, Section 8. Patents are limited by statute to “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” 35 U.S.C. sec. 101. Judicial precedent has long that laws of nature, natural phenomena, abstract ideas, scientific principles and mathematical equations cannot be patented. “Such discoveries are manifestations of nature, free to all men and reserved to none.” Diamond v. Dehr, 450 U.S. 175, 185 (U.S. 1981).

The U.S. Supreme Court addressed the patentability of computerized processes in 1981 in Diamond v. Dehr, 450 U.S. 175 (U.S. 1981). The Court held that computer software to control curing synthetic rubber was patentable, even though the software contained well-known chemistry and physics equations that were already used in the rubber products industry. The fact that the computer system received temperature readings from the molding equipment, determined the optimum mold pressure and duration, and controlled the molding equipment went beyond the mere general computerization of equations. The Supreme Court held in Diamond v. Dehr that a computerized process could be patentable, if the computer program was tied to a particular machine or transformed an object into a different state or thing. That “machine or transformation test”, still allows patenting computers that are control other equipment and use software that is limited to particular processes. See DDR Holdings, LLC. V. Hotels.com, LP, 773 F.3d 1245 (Fed. Cir. 2014) (upholding patent for software to recreate websites and redirect Internet users that required unique algorithms and addressed particular Internet protocols).

In the past few years, the U.S. Supreme Court has invalidated patents for computerized business methods for hedging against risk in financial transactions, currency transactions, using advertising as currency and automated determination of optimum drug dosages. See Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (U.S. 2014). “Simply automating a mathematical principle on a physical machine, namely a computer, is not a patentable application of that principle,” particularly where the patent uses a generic computer, standard hardware, common software and communicating via the Internet. DDR Holdings, LLC. V. Hotels.com, LP, 773 F.3d 1245 (Fed. Cir. 2014).

Judge Failla’s ruling in Kickstarter, Inc. v. Fan Funded, LLC, is consistent with recent decisions by the Federal Circuit Court of Appeals, which has exclusive jurisdiction for patent appeals. In OIP Technologies, Inc. v. Amazon.com, Inc., No. 2012-1696 (Fed. Cir. 6/11/15); 2015 U.S. App. Lexis 9721, the Federal Circuit Court of Appeals held that an automated price optimization method was not patentable. The patent’s claims for using a computer to rapidly send offers to sell items to prospective customers at various prices and compiling the responses merely “describe what any business owner or economist does in calculating the demand curve for a given product.” Since the patent did not identify any specific computer hardware or software, the patent did not satisfy the “machine or transformation test.” A computerized method to manage and play multiple bingo games using generic computers and the Internet was also held to not be patentable. See Planet Bingo, LLC v. VKGS, LLC, 576 Fed. Appx. 1005 (Fed. Cir. 2014); 2014 U.S. App. Lexis 16412. The conclusion from these cases is that many computer applications will need to be protected using intellectual property approaches other than patents, such as copyright registration, trademark, trade secrets and contract.

Patent protection is still available under the “machine or transformation test” for computer programs for manufacturing processes that obtain data from external sources and control equipment, such as oil field monitoring and control, manufacturing processes and specialized data processing. Computer applications that require specialized computer hardware and unique software to address problems that cannot or have not been performed without using a computer may also be patented, as in DDR Holdings, LLC. V. Hotels.com.